BWC Market Update - December 21, 2016
“If thou with steady hand when tempests blow canst keep thy course aright and never once let go.” -Theodore Chickering Williams
Several times in the past year we have noted physicist Neils Bohr’s aphorism that “prediction is hard, especially about the future.” Its wisdom was again exemplified by the U.S. election results (and the Brexit vote in the U.K. last summer). The vast majority of pollsters can join Wall Street analysts and strategists on a fast boat towards irrelevance. The latter group almost uniformly forecast a market disaster in the wake of a Trump victory. Well, they were right, for about two hours. Unless you were trading futures in your pajamas late on the night of November 8, you completely missed the 2000-point round trip in the Dow Jones Industrial Average. All three major U.S. stock indices (the Dow, the S&P 500, and the NASDAQ) were up the next day and have hit multiple new all-time highs since the election.
First, some comments on polling. Almost all statistics classes on sampling discuss the infamous Literary Digest poll in the 1936 U.S. presidential election that predicted a win for Republican Alf Landon over FDR. It was one of the first major calls of a presidential election based on nationwide polling. Of course, Roosevelt won reelection to a third term by 523-8 electoral votes while capturing over 60% of the popular vote. What happened? The poll was conducted by contacting voters randomly by phone and asking their preference. The problem was that phones were still far from universal in 1936 and many more Republicans than Democrats had them. So the poll was doomed to bias from the start.
The 1960s to the 1980s was the “golden age” of polling. Pollsters knew how to take relatively good random samples and just about every family had one phone, wired to the house, that they always answered (remember those days?). There were no answering machines, caller ID displays, cell phones, call-forwarding, etc. With the plethora of advertising, money-raising, and other robo-calls today, people use these features to filter their calls. This makes accurate sampling almost hopeless. This sampling problem is compounded by evidence that political loyalty is more fluid than in generations past. Witness the vast number of voters today who identify as “independent” or “unaffiliated” and the large number of Democrats who voted for Trump (particularly in the critical rust belt states) and the number of Republicans who supported Clinton. Beyond this year’s election and the Brexit vote, there was also widespread inaccuracy in the 2012 presidential polls. The 2016 Wisconsin primary race between Hillary Clinton and Bernie Sanders was missed badly. Then there’s the amazing case of Eric Cantor, the former House Majority Leader, who lost his 7th District of Virginia primary race last year by over 10% when polls on the morning of the election had him up by over 20%!
The record of Wall Street analysts is even worse than that of political pollsters. After their post-election “miss” almost all are calling for U.S. equity markets to be 3-10% higher in the first half of 2017. Maybe. Maybe not. The recent rise in the markets is coming atop soft earnings numbers and hence represents “multiple expansion” in the hope of better earnings in 2017 and 2018. As measured by the Shiller P/E ratio (“CAPE”, or cyclically-averaged price earnings ratio), the market is already in rarefied “rich” territory ventured into only twice in history (1929 and 1999 – that should make you feel better!). The bull market that began on March 9, 2009 is getting long in the tooth and the market is going to have to compete with rising yields in the months to come. Bears in the woods? Who knows? We’ll defer to Bohr and make no predictions, but heed Chickering Williams and invest with the steady hand that years of experience have informed us with here at Beirne Wealth Consulting Services, LLC. In the beginning of the New Year we’ll discuss some investment vehicles that can help weather the markets when tempests blow! Merry Christmas and enjoy the holidays safely!
About Beirne Wealth Consulting
Beirne Wealth Consulting Services, LLC (“BWC”) is a growing, privately owned, SEC Registered Investment Advisor with about $2 billion in assets under management and over 25 employees in Connecticut, Pennsylvania and Florida. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit beirnewealth.com or give us a call today at 888-231-6372.